David Trainer argues Nike is the better investment against Liz Dunn's case for Under Armour. They debate valuation, growth prospects, brand strength, and how Sports Authority's bankruptcy affects Under Armour's retail position.
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Let's talk about that.
Joining us to debate, Liz Dunn from Talmadge Advisors, who prefers Under Armour, and David Trainer from New Constructs, who prefers Nike. Welcome. Thanks to you both for joining us. Liz, why do you like Under Armour here?
Under Armour has significantly more opportunity there. There's just a tremendous amount of white space opportunity for them, channels that they're not in. They're segmenting their business for the first time, and I also think that they're connecting with millennials in a way that is rare in branded consumer products these days. They're leading with technology, and I think some of the moves they've made are very smart.
David, Nike, obviously the much larger company but more mature. Why do you still like this one?
Well, I don't disagree with anything that Liz said. I think you have to look at what's already baked into the stock price. I mean, Under Armour's stock price implies 25% compounded annual growth in profits for nearly 15 years. That would be That'd put them at $90 billion in revenue and about $7 billion in after-tax cash flow. That's a lot bigger than what Nike is today. So, you know, I think Under Armour is a great company. I just think the stock is already priced for, for more than perfection, but enormous amount of growth. And so the risk-reward on Nike is better just because expectations on a relative basis are much lower.
So let me get this clear. You like Nike because you don't like the growth potential for Under Armour? I mean, I'm a little curious here.
No, what I'm saying is that when you're looking at risk-reward, which in a world where you can't predict the future, the best thing you can do. The risk in Under Armour is way higher than the risk in Nike. I like the Nike business. I mean, look, Under Armour is doing a good job of copying the Nike blueprint of getting hooked up with the big stars, building brand, building cachet around associations with people like Steph Curry and Jordan Spieth. Those have been masterful, masterful moves. But Nike's still got some pretty good assets and they still have the ability to get some good assets. Their profits are way higher than Under Armour, so they got better resources. Really what I'm saying is that the Under Armour stock price is assuming already that they're going to knock Nike off the pedestal.
Liz, meanwhile, here's Morgan Stanley when it downgraded Nike, saying they think this whole category, the athletic apparel category, is weakening while competition is increasing. Even though Under Armour has been kind of the catalyst behind that, is it just now a maturity, a maturation phase?
I think there are some pockets of weakness. We've seen weakness in basketball, in the basketball category, which is obviously, you know, Nike dominates that category. But in general, I think we're dealing with a longer-term trend in athletic apparel that is going to, going to persist. It definitely plays well with some of the demographic changes that we're seeing. And so I'm not willing to call, you know, athletic apparel or footwear as a slowing trend at this point. But I do think Nike has a lot more to risk than Under Armour.
But what about the impact of the bankruptcy of Sports Authority? If I remember correctly, that was 25% of Under Armour sales right there out the door. So they've lost a huge outlet for them. So what happens now? How do they make that up again?
Yeah, it wasn't 25% of their sales. It was something much less, I think somewhere around 3%, but maybe a larger portion of their wholesale sales. They, they reduced the percentage that, that Sports Authority was over time. And, and they're doing really well in the direct-to-consumer channel, particularly online. They've got lots of white space in, in markets that they're not in and with retailers that they, they can increase penetration. So I think they have lots of opportunities. You'll see some shakeout with weaker retailers, but they still have tremendous opportunity.
It was 25% of the sales decline that they were talking about. That's right.
That's—
that was what the Sports Authority contribution was. All right, folks, thank you. Liz Dunn from Talmadge Advisors, David Trainer from New Constructs. Thanks for joining us today.
